Lexmark Q2 Earnings Preview: Growth In Printer And Perceptive Revenues In Focus

Lexmark International (NYSE:LXK) is set to release its Q2 2015 results on July 21^st. In Q1 2015, the revenues declined marginally by 3% to $855 million. As the company transitions from its  low-margin hardware business to higher margin software and services, the company’s profitability will increase, in our view. We expect the company to report a marginal decline in revenues from organic streams in its Q2 earnings announcement. However, revenues from acquisitions should offset the decline in organic revenues to some extent, especially for the Perceptive software division. Additionally, we will be closely following the growth in the number of new licenses for its Managed Print Services (MPS) business, as it can offset the decline in non-MPS revenues of imaging and software solutions (ISS). Furthermore, as the high margin business continues to grow, we expect division wide improvement in margins.

See our full analysis on Lexmark

Outlook For Q2 And 2015

For Q2 FY15, the company expects revenues to decline by 2% to 4% year over year and non-GAAP earnings per share to be in the $0.75 to $0.85 range. Lexmark maintains its guidance for the year and expects revenue to decline by 3% to 5% in 2015 and Non-GAAP EPS to be in $3.60 to $3.80 range.

Laser And MPS Revenues to Boost Supplies Revenues

The laser printer and cartridge division is its biggest business unit and makes up for over 82% of Lexmark’s estimated value. In the recent quarters, unit sales of printer hardware and supplies have declined, both for Lexmark and the market at large. According to IDC, the worldwide hardcopy peripherals market shipment declined by 2.5% in Q1 2015. ^[1] However, to some extent, resilience in laser hardware sales has offset the decline in total sales. The total single function printer market declined -8.0% year over year in the first quarter, and total multifunction peripheral (MFP) shipments decreased by -0.3%. However, MFPs showed strong performance in all color laser speed ranges, especially in 31-44 ppm, growing 19.9% year over year. Lexmark has been concentrating on the large work group segment that is typically attached directly to large workgroup networks in corporations. We expect Lexmark to report it gained ground in the laser market in Q2.

Furthermore, there has been a gradual shift in hardcopy peripheral devices away from the desktop and towards more shared and centralized solutions. This shift is driving some of the growth in the printer hardware sales. It is also bolstering revenues for companies that provide MPS, which includes procurement, maintenance and other aspects of printing. The company is offering managed print services (MPS), under which the procurement (of hardware and cartridges), maintenance (of printers and printing solutions) and other aspects of printing managed by Lexmark. As a result of these efforts, Lexmark’s MPS contracts have increased. This has positively impacted its printer supplies business. We believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. We believe that MPS became the biggest driver of revenue in ISS division in Q2.

Revenue Growth from Perceptive Software in Focus

The Perceptive software division is the second biggest business unit and makes up nearly 9.7% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark. During Q1, revenues from this division grew by 34% to $90 million, and the company witnessed excellent growth across subscription, maintenance, and professional services. Lexmark has guided 15% growth in Perceptive’s revenue for 2015. We expect that the growth in Perceptive’s licensing revenue will contribute to the bottom line in Q2 as it is a high margin business. In this earnings call, we will continue to closely follow the deal pipeline for the Perceptive software business.

We currently have a $42.48 Trefis price estimate for Lexmark, which is 4% below its current market price.

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1. Worldwide Hardcopy Peripherals Market Shows a Small Dip in the First Quarter of 2015, According to IDC, May 21 2015, www.idc.com [↩]